The Morning Call
The Market
Technical
Yesterday,
the indices (DJIA 15112, S&P 1628) experienced another volatile day, this
one to the downside. The S&P closed
below the lower boundary of its short term uptrend (1632-1711) for the third time
in the last ten trading days. While not an encouraging sign, that isn’t a
forecast of a further decline---what with yesterday’s decline following
Tuesday’s short term higher high and the S&P remaining above its 50 day
moving average. Indeed as I observed yesterday,
trying to forecast Market direction in the midst of highly schizophrenic
trading is a losing proposition.
Yesterday proved that in spades.
In
any case, our time and distance discipline starts again on the S&P short
term uptrend. Also if the S&P
confirms yesterday’s break, the Averages would once again be out of sync---Dow
short term uptrend: 14832-15566. The
break of the short term uptrend for stocks won’t be confirmed until both
indices have broken the trend.
Both
Averages remain within their intermediate uptrends (14175-19175, 1503-2091) and
their long term uptrends (4783-17500, 688-1750).
Volume
rose slightly; breadth was terrible.
Surprisingly, the VIX was up only fractionally, remaining just under the
upper boundary of its short term downtrend.
GLD
suffered some severe whackage, closing right on its double bottom but below the
lower boundary of its long term uptrend.
Our time and distance discipline now kicks in and will confirm this
break via the time element if it remains below the trend line through the close
next Monday. Clearly, if this occurs, it
would be a huge negative for GLD.
Bottom line: if
all the volatility and schizophrenia are making your hair hurt, join the
crowd. The S&P is establishing,
breaking then re-establishing trends with such rapidity, it renders technical
analysis of little value---at least in terms of defining short term price
direction. I think I will leave it at
that except to remind you that aside from the short term uptrend boundaries,
S&P support exists at 1576 (former all time high) and the lower boundary of
its intermediate term uptrend and resistance is marked by the upper zone of the
May 22 ‘outside down day’ (1675-1687).
Fundamental
Headlines
One
minor and one major news item yesterday.
The minor: weekly mortgage and purchase applications declined.
The
major: the FOMC meeting wrapped up, its statement was released and Bernanke had
his follow up news conference. The statement didn’t vary that much from the
last---economy improving, inflation under control, housing better, blah, blah,
blah. Importantly, (1) it noted that
economic risks had decline and (2) there was no change in the QEInfinity
language---meaning no tapering at this time.
For
those who didn’t read the link yesterday---FOMC statement:
However,
in the post meeting news conference, Bernanke sharpened the timeline on the end
of tapering and the rise in interest rates.
He did it via a discussion on the FOMC members’ consensus projections on
the two key economic indicators that the Fed is watching as policy
determinants, i.e. unemployment (6.5%) and inflation (2%). The points he made, based on the
aforementioned projections, were that tapering could begin around year end 2013
and end in mid 2014 as unemployment declined to the 6.5% figure; but interest
rates would not likely rise until inflation hit the 2.0% mark which would occur
in 2015/2016.
The
FOMC projections
A history of the
aftermaths of Fed tightening (short):
Bottom line: clearly, investors were not happy with the
more definite timetable for tapering. As
you know, I had not expected any change in the Fed statement regarding
tapering. However, I was surprised that
Bernanke got as specific as he did about its likely commencement.
Just to be
clear, I look at tapering starting relative soon as a positive. Indeed, I would be happy if we had never
heard of QEInfinity. That said, we won’t
know if the Fed is too early or too late for a while. What we do know is that (1) the transition
process is close to starting, (2) it is starting from a point of excess
liquidity never before experienced and (3) it has never been successfully
accomplished in history---so bad news is likely lurking out there somewhere.
Of course, our
economic outlook and Valuation Model never supported a Market valued as
robustly as consensus and I have definitely believed that QE was nothing short
of a heroin fix. Hence, any Market
weakness on that bad news will hardly be a surprise.
The question now
is how this new tapering information is going to impact other investors’ economic
forecasts and equity valuations; and if yesterday is any sign, then prices
could come down to more reasonable levels (our current Fair Value is S&P
1419).
That said, our
economic forecast and equity valuation have been at odds with consensus long
enough, that I have no illusion that they will become consensus anytime
soon. Therefore, our strategy will
remain unchanged: higher prices = selling stocks in their Sell
Half Range
Volcker
on the Fed (medium and today’s must read):
Bill
Gross on Fed tapering (medium):
More
from David Stockman (medium):
Investing for Survival
Keys
to successful investing (medium):
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